IPO Guide - FinnCap · PDF file2 3 Introduction The decision to float on a public market is a seminal event in the lifecycle of a business and one which marks the beginning of a new

IPO Guide

‘helping ambitious companies grow’

60 New Broad Street, London, EC2M 1JJ

t: 020 7220 0500 e: [email protected]

www.finncap.com

finncap Ltd is resgistered as a company in England with number 06198898.

Authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange.

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Page GuideIntroduction

Why consider an IPO?

Which market?

Key issues to be addressed ahead of IPO

What investors look for

Creating the right equity story

The benefits of being a public company

What drives value in the equity markets

How will you contribute to the IPO process

IPO process time line

Key advisers

Life after an IPO

Finncap appendix

Credentials

Transactions

Case studies

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IntroductionThe decision to float on a public market is a seminal event in the lifecycle of a business and one which marks the beginning of a new journey. From the very start there are a number of important decisions to be made with respect to the advisory team, timing, structure and market. We hope that this guide will give you a useful insight into these decisions and how the process works.

Inevitably the IPO process itself places the most strain on the executive management as you are required not only to continue running your business successfully but make decisions on the IPO process whilst being subject to a rigorous due diligence process. The team at finnCap has many years of experience and has collectively acted on hundreds of IPOs. We will ensure that at every stage you have the time and advice to deal correctly with the issues that arise.

For us an IPO is a partnership not just for the IPO but for what we hope will be many successful years afterwards as a quoted company. If you choose to start the journey we look forward to working with you. Stuart Andrews

Head of Corporate Finance, finnCap

A London listing – a global kite mark – allows access to diverse pools of investment from around the world and can deliver the funds your company needs to fuel its ambitions.

At finnCap we believe passionately in the power of London’s capital markets. As a leading adviser to stockmarket-listed companies, we know the transformative effect an IPO has on ambitious companies, and how it opens up new markets and starts conversations with partners and investors.

But, the process can appear daunting for a business considering a listing, and that is why it is so important to get the right advice from the outset.

finnCap’s collaborative culture encourages long-term relationships. We focus on: giving you the right advice to make informed decisions; producing insightful research that helps investors to value your company and its future potential; delivering ongoing introductions to new investors; and, access to investment when it is needed... and we will be alongside you every step of the way.

Our team has produced this guide to provide an introduction to London’s stockmarkets, why you should consider an IPO, and what happens next.

We would love to discuss your business with you, so please don’t hesitate to contact me or one of the finnCap team to start a conversation which could transform your future growth plans.

Sam SmithCEO, finnCap

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Sect

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Number of IPOs

Industrials

TMT (Technology, Media and Telecoms)

Financials

Consumer

Life Sciences & Healthcare

Support Services

Resources & Energy Real Estate & Construction

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The IPO Market is Returning

Why Consider IPO?

2015 IPOs2015 IPOs included the AA, Autotrader, Revolution Bars, Sophos, Stride Gaming and Market Tech.

ACCESS TO CAPITALGoing public allows a broad exposure to a large

pool of investors to fund growth

ACquISITION FIREPOWER/CuRRENCyAllows you to use your company’s shares to

make acquisitions

Bubble size denotes total funds raised in each sector *Main Market and AIM IPOs (<£500m) 2015

BRANd EquITyGoing public provides a sense of corporate stability

and increases your brand awareness and profile

INCENTIvISE yOuR EMPLOyEESuse share options to incentivise and retain key staff

REMAIN INdEPENdENTProvides opportunity to partially exit without selling

out to PE/vC thereby retaining control

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76

AIM

A few investors will not/cannot invest in AIM-listed stocks

AIM IPOs perceived to be higher risk

Investors unit size may be limited due to perceptions of reduced liquidity

BenefitsC

onsiderations

Access to uK & small-cap investors with risk appetite, growth focus and international outlook

Relatively quick IPO process as documentation vetted by NOMAd, not uKLA

Streamlined process for acquisitions post IPO

‘Large fish in a small pond’

May have tax advantages for existing and new investors

Main Market

More complex regulatory process prior to IPO

More onerous requirements around acquisitions and placings

More demanding governance standards

Listing fees higher

BenefitsC

onsiderations

Prestige market for ‘blue chip’ and large cap stocks in the uK

direct access to Main Board uK investor base

Provides potential investors with the highest level of comfort

More ‘index’ investors

Carries corporate governance ‘seal of approval’

Which Market?

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MARKETMAIN MARKET

PREMIuM LISTINGMAIN MARKET STANdARd

LISTINGAIM

Minimum free float 25% 25% 10% - 15% as guidance

Minimum market cap £700k £700kNomad assessment

of suitability

Audited historical financial information

3 years3 years or shorter

period, if applicable3 years or shorter period,

if applicable

75% of business supported by revenue earning record for the

3 year periodyes No No

Control over majority of assets for the 3 year period

yes No No

Working capital statement Must be clean yes AIM Rules

Sponsor or NOMAd required Sponsor Required No Nomad required

Listing document Prospectus Prospectus Admission document

A good company will sell itself, regardless of the market

Key issues to be addressed ahead of IPO REMuNERATION STRuCTuRES

• Post-IPO structure needs to be consistent with market mood

• Management incentive schemes commensurate with size and peer group

IFRS ANd FINANCIAL dISCLOSuRE

• Three-year audited historical financials required

• Conversion to IFRS

• Building achievable financial forecasts

• Financial reporting procedures–requirement to evidence adequate financial reporting and control systems at IPO

MANAGEMENT PARTICIPATION ANd LOCK-uP

PROvISIONS

• Post IPO sales by management and major shareholders are always sensitive

• A measured disposal combined with a lock-up period will be accepted by the market

• Establish and coordinate liquidity/exit roadmap for major shareholders

• Lock-up period for major shareholders and management: Phased sale over two years

ENHANCE PROFILE

• Carefully handled initiatives to increase the visibility of the company in both trade and financial circles will aid marketing of the business during the IPO process

• Areas to focus on include:

• Appointment of financial PR

• Build media coverage via selected meetings with key journalists

BOARd STRuCTuRE

• Balance of Executive and Non-Executive directors (NEds), and in particular Independent Non-Executive directors (INEds), such that no individual or small group can dominate Board decision making

• At least half the Board should comprise INEds

• The non executive directors should bring a combination of the following:

• PLC background–known and respected by investors

• Finance background–”recent and relevant financial experience” necessary for audit committee chair

• Sector experience–not essential for the market, but likely to add value in the business

• Investors will want to see a strong, well respected and senior independent director

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What Investors Look For

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GROWTH OPPORTuNITy

CASH GENERATION

EARNINGS vISIBILITy

STRONG MANAGEMENT

INduSTRy dyNAMICS

KEy THEMES

Potential to accelerate growth

Ability to capitalise on opportunities (e.g. acquisitions)

Good free cash flow conversion

Ability to sustain dividend growth

Track record of revenue growth and margin resilience

Predictability of future earnings

Past track record

Future incentivisation creates alignment with shareholders

Strong corporate governance

Attractive end markets

‘blue chip’ and sticky customers

Barriers to entry

CAPITAL STRuCTuRE

KEy METRICS

vALuATION ANd OFFER STRuCTuRE

ATTITudE TO SELL dOWN

TIMING ANd PROCESS

KEy THEMES

Not over leveraged

Concerns above 2x net debt/EBITdA but depends on credit and cash profile

P/E ratio critical to all investors

Other metrics vary in their importance to individual investors (Ev/EBIT, free cash flow, Ev/EBITdA, Price/Book)

Focus on valuation and peer group

Important to keep some value ‘on the table’ for investors

Aftermarket liquidity is key

If majority of fundraise is for selling shareholders, valuation may be lower

Remaining stock will need to be “locked-in”

Investors are open to IPO discussions now

No predetermined preferences on sectors

Identity of sponsor/nomad will be key

Benefits of an IPO

PROvISION OF CAPITAL TO FACILITATE GROWTH

• Additional source of capital for future investment

• Provides attractive acquisition currency in the form of publicly traded shares

BROAdEN SHAREHOLdER BASE • Potential for existing investors to realise part of

their investment (if they wish to do so)

• Broaden shareholder base to institutional funds through IPO offering

• Creates a market for company’s shares to trade freely between investors/market participants

• Assist the recruitment, retention and incentivisation of key management and employees through equity incentive schemes

MAXIMISE vALuATION • Research analyst would produce a report directing

market on their view of valuation

• Investors subsequently value the company

IPO and trading prices reflect an ongoing and objective market valuation of the company driven by investor sentiment and view on valuation

• value significantly increases post IPO if forecasts are met or exceeded

INCREASE PROFILE • A public listing will raise the profile of the

Company materially

• Greater overall visibility

• Enhances brand

• International investor knowledge

• Favourable for suppliers and customers

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What Drives Value in Equity Markets

GROWTH • Investors invest for a return on their capital

• In equity markets, most investors are looking for growth

• In earnings

• Through volume

• Through margin enhancement

• Short term focus

• Current year EPS

• 18–24 month perspective

• Medium to long perspective

• The five-year sustainable growth rate

MuLTIPLES• Key multiples are PE ratio and Ev/EBITdA ratio

• Key drivers of multiples are:

• Rate of earnings growth

• quality of earnings growth: the reliability of growth

• Margin: as a proxy for the added-value of a product or a service

• delivery on expectations is critical a “under promise and over deliver” is key

CASH GENERATION• Cash-generation a key financial metric

• Cash generation allows:

• Re-investment in the business: R&d; Manufacturing; Sales

• Reinvestment in acquisitions

• Enhancing future growth, or

• Return of surplus capital to shareholders: dividends, share repurchases enhancing total shareholder returns (TSRs)

• Fundamental value frequently based on dCF

RETuRN ON CAPITAL• Another key benchmark

• For the existing business

• For new investment

• Are the existing or expected returns in excess of the Company’s cost of capital?

• And by how much?

• What shareholder value is all about

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How will you Contribute to the IPO Process

BuSINESS STRATEGy/INvESTMENT CASE• Equity story will position the company to potential

IPO investors

• Equity story presentation will include the competitive advantages, strategy and growth prospects for the group and each division

• divisional teams will need to assist the advisers in finalising the equity story

• Company view on future industry trends impacting each division will also be needed

BudGETING• valued by the market based on 1 year forward forecasts

• Budgeting will also feed into the required working capital analysis for the IPO

• Accurate forecasts therefore vital for the IPO process

• Subsequent achievement of those forecasts also key to post-IPO performance and validating future growth prospects

ACCOuNTING PREPARATORy WORK• 3 years audited IFRS accounts required for IPO ad doc

• Auditors also required to report on working capital forecasts

• detailed “Long Form Report” is the principal due diligence report for the IPO and is produced by the company’s accountants

• Accountants also required to review internal financial and operational controls

• Finance teams will need to commit significant resource to this preparatory work

duE dILIGENCE • Private reports that principally cover commercial, legal and

accounting aspects of the business

• Also includes areas such as insurance, environmental issues and corporate governance

• Process largely driven by advisers, but will require significant input and resource commitment from divisional teams

• Supports disclosure in the various IPO public documents

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IPO Process Time Line

1 - PREPARATION 4 - ROAdSHOW

T-12 WEEKS T-2 WEEKS

2 - ANALyST EduCATION 5 - PRICING

T-6 WEEKS T

3 - TRANSACTION LAuNCH 6 - AFTERMARKET

T-4 WEEKS T+4 WEEKS

KEy dRIvERS: AvAILABILITy OF AudITEd FINANCIALS, EXTENT OF CORPORATE RESTRuCTuRING REquIREd, COMPLETION OF dOCuMENTATION

Equity story/business plan/capital structure finalised

Management and Board

Audited accounts and short forms if required

drafting of prospectus or admission document and other documentation

due diligence

Price range communicated to the market

Roadshow launch One-on-one meetings

with key institutions Group meetings

Bookbuilding Transparency demand profile demand tension

Pricing scenario analysis

Brief analyst

Target investor base identified–potential early meetings

Management preparation for announcement day

demand review

Allocation Earliness quality Price Leadership

verification of due diligence

Finalise Pathfinder document

Salesforce briefed by company

Announce intention to float

Research published

finnCap to assess initial demand profile and recommend indicative price range

Stable market established

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Key Advisers

FINANCIAL AdvISER/NOMAd/SPONSOR/ BROKER

ACCOuNTANTS

OTHER – PRINTERS – REGISTRARS

LEGAL AdvISERS

PR

Overall co-ordination of advisers and management of process

As Nomad/Sponsor, responsible for listing requirements/suitability for listing

Liaison with investors

Preparation of long, short and working capital reports

Responsibility for financial statements in documentation

Tax advice/structuring

Production and distribution of documents

Preparation of legal due diligence

drafting of documentation

Tax advice

Overseas requirements if applicable

Marketing amongst sell side analyst community and liaison with press

Adviser Key Responsibilities

Life after an IPO

An IPO is just the start, after-market is key. Appoint the right advisers who can help you navigate the journey and fulfil your growth strategy.

REGuLATORy • Ongoing confidential advice on all

matters surrounding the AIM Rules, Listing Rules and Takeover Code

• Advice on results and other announcements

• Corporate Governance best practice advice

AdvISORy• Full range of corporate finance services

• Senior team with strong range of skills and experience

• M&A and strategic financial advice

CORPORATE BROKING ANd SALES • Largest growth company broking

and sales team

• Comprehensive CRM system delivering real-time feedback on share price movement

• Over 200 institutional and PCB clients

• Aftermarket care and focus

• International reach, especially in Europe

MARKET MAKING / SALES TRAdING• Over 130 stocks under the FCAP banner

• Strong presence in all our corporate stocks

• Increased market intelligence and liquidity post-Admission

INvESTOR RELATIONS• Co-ordination of holder and non-holder

institutional and PCB roadshows (Edinburgh, Leeds)

• Regular investor feedback

• Share register analysis

RESEARCH • Market leading commentary from an AIM award -

winning team

• Note published on release of full year and interim results

• Ad hoc notes released in reaction to market news

• Innovative distribution methods – videos and sector notes

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finnCap Appendix

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finnCap is the No.1 broker to AiM companies, and top 5 adviser on LSEOur team has a strong track record in advising and raising capital, providing research, and

after market care for ambitious growth companies.

Our ServicesCorporate Finance – fund raisings; IPOs and private

equity transactions; private company acquisitions and

disposals; recommended and hostile offers; and general

strategic advice.

Corporate Broking & Sales – Focused on building

long term relationships with corporates and institutions,

we have successfully completed a wide range of IPOs and

secondary placings. We focus on providing our clients with a

stable shareholder base and long term support.

Research – Award winning team that works closely

with the broking and sales team to support our clients

with insightful, relevant and timely research across a

number of key sectors.

Trading and Market Making – Our sales

trading and market making team delivers best price

and liquidity to our institutional clients and strong

support for corporates.

Raised over £1bn since inceptionAs specialists in the growth area of the market, we have led well over a billion pounds of both

M&A transactions and fundraisings for our clients since inception.

Advised on 18 IPOs in the last three years We have a strong track record in delivering IPOs for our clients and have advised on a

number of successful deals in the last three years.

Expert AdviceOur team advises on a variety of transactions from fundraisings to acquisitions and general

strategic advice.

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Recent Transactions

Constellation Healthcare

Lifesciences

CityFibre Infrastructure

HoldingsTechnology

Maintel HoldingsTechnology

Jelf Group

Financial Services

Placing £30m

Placing

december 2015

Placing £80m

Placing & Acquisition

January 2016

£48.5m Reserve takeover

Placing £24m

April 2016

Transaction value £258m

Takeover by Marsh

& McLennan

december 2015

Case Study: Maintel SuMMARy • Maintel is a leading independence business to business reseller

of voice and data solution

• finnCap has acted as Nomad and Joint Broker for the Company since July 2009

• Share price appreciation of 702% since take-on1

• The Company has completed 4 acquisitions since finnCap’s take-on and IPO

• finnCap acted on the successful secondary fundraise of £24m in April 2016 for the transformational acquisition of Azzurri Communications (total consideration of £48.5m)

• Trading market share 2016 yTd: finnCap 78%, Peel Hunt 12% and Winterflood 7%

1 As at 20 April 2016 2 As at 1 November 2015

KEy SHAREHOLdERS

SHARE PRICE PERFORMANCE

CORPORATE ACTIvITy 1 October 2011: Acquisition of Totility for a total consideration of

£2.83m

2 March 2013: Positive results showing the successful integration of Totility and a growth in profit before tax of 26%

3 September 2013: Acquisition of datapoint and its Irish trading operations for a total consideration of £3.5m

4 October 2014: Acquisition of Proximity Communications for a total consideration of £11.6m

5 March 2015: Positive results showing a 35% increase in revenue and 16% increase in profit before tax

6 April 2016: Acquisition of Azzurri Communications for a total consideration of £48.5m

Kestrel Investment Partners

Business Growth Fund

Slater Investments

Octopus Investments

Herald Investment Management

Hargreave Hale

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Sell Downs post IPO

Quixant

Utilitywise

Quixant

Utilitywise

Quartix

Utilitywise

Quartix

Redcentric

Placing of £25.0m management equity

Placing Price: 140pDiscount to prevailing price: 13%

Premium to IPO price: 204%

April 2014


Placing Price: 290pPremium to prevailing price: 0.1%


June 2014

Placing of £8.0mmanagement equity



April 2016




June 2013




October 2015




October 2012


Placing Price: 347pDiscount to prevailing price: 0.01%


April 2016




April 2014

Case Study: CityFibre SuMMARy • CityFibre is the largest independent designer, owner, builder and

operator of fibre optic infrastructure to mid-sized cities and major towns

• CityFibre provides gigabit capable infrastructure for enterprise and public sector organisations, service providers, mobile network operators and businesses

• CityFibre was admitted to trading on AIM on 17 January 2014, raising £16.5m from blue chip institutional investors

• CityFibre returned to market on May 23 2014 to raise £30m from institutional investors to accelerate the roll out of its fibre networks

• On 14 december 2015, CityFibre raised £80m from institutional investors to acquire assets from KCOM Group Plc

• On 6 April 2016 finnCap traded 15m shares (>£7m) clearing an institutional overhang

• Trading market share 2016 yTd: finnCap: 21.8%, Liberum: 15.4%, Winterfloods: 4.4% 1

1 As at 20 April 2016

KEy SHAREHOLdERS

SHARE PRICE PERFORMANCE

CORPORATE ACTIvITy 1 January 2014: Admission to AIM and placing to raise £16.5m from

institutional investors

2 February 2014: CityFibre announced as the preferred bidder to acquire the Coventry Metro Area Network

3 March 2014: Sky and TalkTalk partnership to launch ultra-fast broadband to the home in york

4 April 2014: RNS detailing the scale of businesses signing up to use CityFibre’s metro fibre network

5 May 2014: £30m oversubscribed placing to accelerate the roll out of its fibre networks

6 November 2014: Signing of a long term national framework agreement with mobile network operators EE and Three uK

7 december 2015: Placing to raise £80m to acquire national infrastructure comprising of approx. 1,100 route kms of metro network assets

8 March 2016: Southend contract awarded to build a 50km future-proof dark fibre network connecting 120 key public sector sites

9 April 2016: deals with Exa Networks and diva Telecom extend fibre broadband networks in Leeds and Bradford.

10 April 2016: CityFibre delivers profit ahead of schedule

Aviva Odey Asset Management

Herald Investment Management

Octopus Investments

Hargreave Hale

Baillie Gifford

Jupiter

Miton

Allianz

Woodford

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60 New Broad Street, London, EC2M 1JJ

t: 020 7220 0500 e: [email protected]

www.finncap.com

Contact Us

Stuart Andrews

[email protected]

020 7220 0565

Jonny Franklin-Adams

[email protected]

020 7220 0579

‘helping ambitious companies grow’

Documents

IPO Guide - FinnCap · PDF file2 3 Introduction The decision to float on a public market is a seminal event in the lifecycle of a business and one which marks the beginning of a new